Medicare

Along
with Medicaid, Medicare is one of the nation's primary health insurance
programs and, in many ways, it has been one of the federal government's
most significant success stories. It provides coverage to nearly 39 million
people, or about 14 percent of Americans and nearly every senior aged
65 or older. By comparison, before Medicare was enacted in 1965 just 56
percent of seniors had hospital insurance.

In recent years, however,
Medicare's long term finances have come into question. While several proposals
have been made to significantly alter its finances and structure, only
relatively modest changes have been enacted into law. This may change
in the coming year, however. The Bush administration is expected to push
for major reforms in the coming session of Congress.

Medicare Basics

Medicare is managed by the Health
Care Financing Administration (HCFA), a division of the U.S. Department
of Health and Human Services which also administers Medicaid. Medicare
is divided into two parts, Parts A and B. Part A, also known as Hospital
Insurance (HI), covers health care provided in hospitals, nursing facilities,
and hospices, and some care provided by home health services. It is financed
by a payroll tax of 2.9 percent, which is divided equally between employers
and employees. In fiscal year (FY) 1999, Part A provided coverage to
33.6 million seniors and 5.3 million people with disabilities. About
22 percent of those covered actually received medical services through
Part A in 1999.

Part B, also known as Supplementary
Medical Insurance (SMI), provides optional additional coverage for doctor's
visits and other out-patient services such as those provided by physician
assistants, nurse practitioners, and clinical laboratories. Part B is
financed through a combination of monthly premiums ($45.50 in 2000) and
general tax revenues. In FY 1999, 32.3 million seniors and 4.6 million people
with disabilities were enrolled in part B.

While Medicare's long term financial
prospects have been questioned, its short term financial prospects are
solid. In FY 1999, the Hospital Insurance Trust Fund (Part A) collected
$153.0 billion in revenues, most of which ($134.4 billion) was from payroll
taxes paid by approximately 155 million covered workers. The rest was from
interest accrued by assets in the Hospital Insurance trust fund ($9.5
billion), taxation of Social Security benefits ($6.5 billion), and other
miscellaneous revenue. In FY 1999 the program spent $131.4 billion ($129.4
billion on medical services), for a surplus of $21.6 billion. The year's
surplus brought total Part A trust fund reserves to $138.7 billion at
the end of the fiscal year.

The short term finances for Supplementary
Medical Insurance (Part B) are similarly good. In FY 1999, the program
took in $85.3 billion in revenues, most of which represented transfers
from the U.S. Treasury ($62.2billion). Other revenues came from monthly
premiums paid but enrollees ($20.2 billion) and trust fund interest and other
income ($2.9 billion). That year the program spent $80.5 billion, most
of which ($79.0 billion) was for medical services. The year's surplus
was $4.8 billion, which brought total Part B trust fund reserves to $45.6
billion at the end of the fiscal year.

Altogether, $212.0 billion was
spent on Medicare in FY 1999, making it one of the federal government's
largest programs.

Medicare's long term prospects
are less rosy. According to the Medicare trustees, the Hospital Insurance
trust fund will continue to run a surplus until 2017, when it will begin
to run a deficit and start drawing down trust fund reserves. Absent any
policy changes, the trustees estimate that the trust fund will be depleted
in 2025. Over the next 75 years (2000-2074), the trustees estimate a
programmatic financial shortfall equal to 1.21 percent of taxable payroll.
In other words, immediately raising the combined payroll tax on employers
and employees from 2.9 percent to 4.11 percent would be sufficient to
cover long term shortfalls.

Recent Reform Proposals

The most significant legislation
affecting Medicare that has been enacted in recent years was the 1997
Balanced Budget Act, which President Clinton signed into law on August
5 of that year. The legislation's primary goal was to balance the federal
budget by 2002, which at the time was still operating in a deficit. It included
language trimming growth in Medicare spending by $116.4 billion over
five years, most of which was due to reductions in payments to health
care providers (hospitals and doctors). The legislation also increased
Medicare Part B premiums, established new Medicare+Choice managed care
plans, and created a bipartisan commission to study Medicare's long-term
finances and report back to Congress.

The commission, also known as
the National Bipartisan Commission on the Future of Medicare, was chaired
by Sen. John Breaux (D-LA) and Representative William Thomas (R-CA),
now chairman of the House Ways and Means Committee. In March of 1999 the
commission disbanded, unable to achieve sufficient unity to forward an
official recommendation to Congress. The commission did not go out without
controversy, however. A plan backed by Sen. Breaux fell one vote short
of the required majority needed to endorse an official set of recommendations.
Among other provisions, the Breaux plan would have transformed Medicare
into a premium support system, where instead of Medicare directly covering
beneficiaries or underwriting their participation in HMOs, beneficiaries
would be given a fixed amount of money to purchase private health insurance.
Breaux's plan would also have raised the age of eligibility from 65 to
67, as has already been done with Social Security, and provided prescription
drug coverage for low-income individuals with incomes of up to $10,568
and couples with incomes of up to $13,334. Partly because the plan ignored
his call to transfer Medicare some of the budget surplus expected over the
next ten years, however, Clinton refused to urge his own nominees on
the commission to support the Breaux plan.

Instead, Clinton released his
own set of recommendation on June 29, 1999. The central feature in Clinton's
plan was a transfer of $794 billion in surplus general tax revenues to
the Medicare program from 2000 through 2014, extending the program's
insolvency date. Clinton's plan would have also created a new prescription
drug benefit and eliminated copayments and deductibles for preventive
care.

Following this impasse, and facing
increased political pressure from health care providers, Congress began
to reverse some of the spending cuts in the 1997 Balanced Budget Act.
In late 1999, Congress enacted legislation restoring $35 billion in Medicare
and Medicaid funding to hospitals, nursing homes and health plans over five
years. In 2000 Congress restored another $16 billion in Medicare funding
to various providers. Significant structural reforms, however, were put
off until the coming session of Congress.

In his campaign for the presidency,
George W. Bush criticized the Clinton-Gore administration for failing
to lead on Medicare and other issues. Bush is expected to appoint a new bi-partisan commission to review Medicare's long term finances and other
possible changes, such as the inclusion of a new prescription drug benefit.
After the commission issues its recommendations, Bush may submit a proposal
to Congress in late 2001 or early 2002.

Playing Politics with Medicare: The details surrounding the new Medicare legislation become more sinister every day. (Center for American Progress: February 5, 2004)

Analysis: Medicare Legislation: The Republican leadership and Medicare conferees appear to be in the final stages of hammering out an agreement on a Medicare prescription drug benefit and other significant changes to the Medicare system. Much is at stake. (Center for American Progress: November 14, 2003)